* Euro zone yields fall as both sides flag Iran talks

progress

* US yields fall less; US-German spread at 9-month high

* Global yields jumped at start of week on inflation

fears

(Adds further details, commentary and charts)

By Harry Robertson

LONDON, May 22 (Reuters) - Euro zone bond yields fell on

Friday as investors reacted to signs of progress in Iran peace

talks, pulling government borrowing costs away from the

multi-year highs reached earlier in the week.

The fall helped keep the spread between U.S. and German

10-year bond yields at around the widest since August 2025,

reflecting rising bets on Federal Reserve rate hikes.

Germany's 10-year bond yield, the benchmark for

the bloc, fell 4 basis points to 3.062%, while Italian and

French yields fell slightly further .

Yields move inversely to prices.

The German 10-year yield hit a 15-year high of 3.2% on

Tuesday as investors braced for interest rate hikes after the

disruption from the Iran war sent energy prices surging and

bonds tumbled around the world.

Yet Brent crude oil prices fell on Thursday and last

traded at around $106 a barrel, compared with $113 on Monday, as

both Iran and the U.S. reported some progress on peace talks.

U.S. Secretary of State Marco Rubio said there had been

"some good signs" in talks. A senior Iranian source told Reuters

on Thursday that no deal had been reached but that gaps had been

narrowed.

"Even if signals remain conflicting at times, there is a

suggestion of progress - or at least a narrowing of the gap

between the warring parties' positions," said Benjamin

Schroeder, senior rates strategist at ING.

Traders in money markets on Friday priced in around 65 bps

of rate hikes from the ECB this year, implying two increases and

a 60% chance of a third. That was down from more than 70 bps

earlier in the week.

U.S.-GERMAN SPREAD RISING

While European yields have fallen back from multi-year peaks

this week, aided by falling oil prices and economic fears, U.S.

yields have remained relatively high.

The spread between the 10-year U.S. Treasury yield and its

German counterpart rose above 152 bps on Thursday, its highest

since August 2025, and last traded at 150 bps.

Markets now see a roughly 50% chance the U.S. Fed will hike

rates this year, compared to expectations of two reductions

before the war began.

"The repricing of Fed expectations has been the primary

driver of higher (U.S.) rates," said Gennadiy Goldberg, head of

U.S. rates strategy at TD Securities.

"Rising inflation expectations and still-solid growth

momentum have contributed to the upward pressure."

U.S. 10-year yields have risen by almost 18 bps in May to

more than 4.5%, their highest in 16 months, compared with an

average 6-bp rise for the rest of the G7. German Bund yields, by

contrast, are up around 3 bps.

Two-year Treasuries, which reflect Fed rate expectations,

have been the worst performing major-economy bonds in May, up

nearly 20 bps.

"Europe is more directly exposed to the energy market

disruptions and stands to benefit most from a timely resolution

to the blockage of the Strait of Hormuz," said ING's Schroeder.

Survey data on Thursday showed economic activity in the euro

zone shrank at its sharpest rate in more than two-and-a-half

years in ​May.